Macroeconomic Performance of the Ten Countries Essay Example for Free

Macroeconomic Performance of the Ten Countries Essay What was Expected from the Governments and Central Banks of These New Entrants? On May 1, 2004, ten Central European and Mediterranean countries joined the EU and their names are as follows: Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, and Slovakia.   This raised the enlargement to 25 countries that comprise of 450 million people, which is more than the population of the U.S. and Japan combined. [1] This accession will compel the new member states governments to utilize the EU legislation without much exception and will enable them to enjoy all the advantages that go with it, and once they go through a certain period and show improvements, they will be included in Schengen area and the euro zone. In addition, from the year 2004 to 2006 they are entitled to receive a payment of 45 billion euros in a form of a community aid and 30.7 billion euros in a form of payment appropriations.   As a result, according to two treaties that were signed in Amsterdam and Nice that were the basis through which the enlargement was conducted, the intent of the whole arrangement was to make the enlarged Europe more democratic, transparent, and effective calling on all governments to work on these areas. The end result of the enlargement had been labeled as a historical precedence that will change the dimensions of the continent and it is believed to put the division of the past behind ushering in democracy, freedom, and stability to the whole region.   At the same time it is believed that it creates opportunities for all involved where the early 15 nations business share and economical activity had increased, while the new entrants have also reaped economic advantage that was not available for them before the assesstion. What had come into existence is a union of 450 million people and had already represented at the time the union was effected one-fourth of the world wealth, giving the region a new leading economic power.   In addition, the role the continent is playing in the international scene had gotten enhancement, especially in security and defense policy. [2] The new states and their governments that are joining the Union will have to adhere to the Copenhagen Criteria and it has three components.   The first component is any of the nations that are joining the union should reach a certain level of stability and should have establishments that oversee and guarantee democracy, the rule of law, human rights, and the observing of the rights of minorities.   Then the second one which is an economic criteria stipulates that the nations adhere to the principle of the market economy and have a mechanism that enables them to deal with competitive pressure and market forces that will be directed at them after joining the EU. What is called acquis communautaire adoption criterion anticipates that the candidates should put themselves in a position to shoulder the membership’s obligations, as well as a strict adherence to the principles of the political, economic, and monetary union.   Through all this process the Union is responsible for evaluating, recommending, and approving of the states’ performance and it will evaluate the capacity of the Union to absorb more members without affecting the normal functioning of the existing Union members. The process starts when European countries apply to join the Union and that will be evaluated based on how the applicant nations with the guidance of their respective governments meet the Copenhagen political and economic criteria, and the accession is granted only when the requirements are met.   The nations through their governments will have to agree to apply the EU legislation that is over 80,000 pages from day one, even if there are a few exceptions that will allow the new entrants a leeway as long as it is not going to intervene with the smooth operation of the activities of the other members.   When the EU is convinced that the applying nations meet all the requirements of the Copenhagen criteria the next phase will kick in, which is the signing of the accession treaty. [3] The ten Central European and Mediterranean states, through macroeconomic plans that were introduced and carried out by their respective governments had gone through this process before getting permission to join the Union.   And once they joined the Union there are more questions arising because it is difficult to say what currency they should be using and as long as they meet the Maastricht criteria they are expected to the join the euro zone by abandoning their own currency. Here the various central banks play a leading role because it is known that it will take them some time to meet the requirements and while working to meet the requirements they will have to focus on their structural and economic reforms so that they will manage to have a better convergence in both nominal and real terms.   Since the other requirement before joining the euro is entering the Exchange Rate Mechanism of the European Monetary System, the ERM II will require them to abandon their own monetary policy. It does not necessarily mean this route fits everyone since the rigorous stability requirement applied by the exchange rate could derail the existing stand of their current account, simply because when there is appreciation in their currency it will affect their competitiveness, because of the high price they will be forced to charge.   The other worry is joining the ERM II should not result in overvaluing their currency whereby they will be obligated to devalue their currency in the two years test period.   From what had been witnessed most of the nations had an open economy that was heavily reliant on trade with EU countries and if they can eliminate the transaction cost in any way, which would include currency exchange, they will embrace it. [4] The final outcome was from the ten countries that joined the Union Slovenia, Lithuania, and Estonia were able to enter the ERM II and were expected to join the euro zone on January 1st, 2007, simply because they had met most of the criteria. But the only nation that managed to join the euro was Slovenia showing that the others did not meet some of the requirements, they need more time to make the adjustments, and might be able to join the euro by the year 2008. The other three nations Latvia, Cyprus, and Malta had also joined ERM II and could join the euro in 2008.   The remaining members Czech Republic, Slovakia, Hungary, and Poland are deemed to wait longer to better meet the criteria.   [5] The Macroeconomic Policy These Nations had been Following After Joining the Union. To address this question starting from the Central European nation that just joined the euro zone in January 1, 2007 might shed light on the areas that the nation did right while the other two nations Lithuania and Estonia will have to wait at least up to 2008 to be evaluated if they would meet the requirement of the ERM II.   The nation had $17,290 per capita income in 2005, it had a population of two million people, and it was among the most successful transition economies.   The nation’s GDP per capita in 2005 was 81% of the other EU members, which must have helped it to get a high score, since it is the only nation that has such a high percentage. According to the report the prosperity of Slovenia is due to its gradual and consensual approach to reform, which has made it different from the other nine countries.  Ã‚  Ã‚   It has worked hard to attain this position although lately its competitiveness is eroding.   Another area that had lagged was foreign direct investment (FDI) due to the slower pace and the general reluctance to interact with foreign sources resulting the FDI to be 1.2% of GDP between 1997-2005.   Even if it had reached once to 7% of GDP it had gone back to .02% of GDP in 2005 and this falling behind is curtailing the advancement the nation could have attained, yet it did not prevent it from joining the euro, simply because the possibility is within reach. [6] As far as economic growth is concerned the nation has averaged 3.9% it the mentioned period and had managed to fend off macroeconomic imbalances that were commonplace with the other transitional economies and its tight fiscal and monetary policy had resulted in allowing it to have a near balanced budget with a 1.7% budget and 1.1% current deficit, another good performance that was coupled with an enhanced foreign trade. The country also had managed to bring inflation under control and it had it at a single-digit since 1996.   Another advantage the nation had was it had a strong performance where the GDP growth was at 3.9% fueled by a rise in foreign demand.   In all this, inflation was under control at 2.5% and that was attained by allowing wage to lag behind productivity growth, by making up for oil price increase by introducing excise tax, and by attaining a stable exchange rate. [7] The next nation to look at is Lithuania which was among the three nation that were slated to join the eruo in 2007,   but has not made it and looking at its performance might shade light on how it fared.   The first glaring difference between the two countries is the per capita income where in Lithuania it was $7,210 in 2005 even if the population in Slovenia was only 1.4 million, whereas the population in Lithuania is 3.4 million. Other than that the GDP growth of 7.5% was much higher and it was the fastest growing economy in the region. It also had much more to export, which included refined oil, machinery and equipment, and textile.   It is not different than the other countries that are heavily dependant on the euro zone for their exports, the average being 60%.   The other advantage it had over Slovenia was it had enjoyed a peak GDP growth of 10% in 2003 since it was in a better position to create wage growth by bringing down unemployment from 17% down to 6% and in doing that it had got help from the EU fund that it was entitled for joining the Union in 2004. At the same time, it had a much better domestic demand that is enabling it to drive its economy.   Yet, there is a sign of heating of the economy as there is shortage of workers since they are migrating to the UK and Ireland.   After joining ERM II it had shown an impressive commitment to adopt the euro and was able to liberalize its pricing and most of its trades had been directed to the EU zone.  Ã‚   The other factors such as privatization had been taken care of to the point where all factors of production are in the private hands, and it had also been working in the area of FDI that is seeing a steep increase.    If there is another aspect that is holding it back it could the unparalleled poverty level in the nation and it is at 52% purchasing power parity compared to 81% enjoyed by Slovenia.   And one of the reasons that it did not qualify might be at least 16% of its population lives under the poverty line and poverty is widespread in the rural area where it is considered to be up to 57% of the poor are living.   That area might be the reason that contributed to its being held back for a while since all the indicators including health and education are going badly lacking in these regions. [6] Estonia that was in the list to join the euro in January 1, 2007 with the other two nations is a relatively smaller country with a population of 1.35 million and its per capita income is $9,100.   This nation has fewer natural resources and it depends on trade for the most part.   Its main specialty export is telecom.   Its GDP growth performance was not bad at 7.5%. The country had been a main gateways for trade between the Soviet Union and the West that is said to have given it some advantage and because of that the education level and the standard of living of the people was higher that other member countries. In 2005 its GDP growth had reached 9.8% resulting in the heating up of the economy as the unemployment rate had gone down, while at the same time workers are migrating to the other EU countries.   What is driving its economy is the domestic demand that is expanding due to income growth and credit expansion that is also taking export higher.   If there is any problem highlighted it is the overheating of the economy and the current account defect that is at 11% of GDP in 2005 and was at 13% in 2004, which would mean this could be one of the reasons why its plan to join the euro in 2007 had been postponed. [8] The other three nations slated for 2008 to join the euro are Latvia, Cyprus, and Malta.   Latvia has a per capita income of $6,750 and has 2.3 million people where one-third of them are living in the capital city.   The nation has few natural resources and is an importer for the most part and the import includes natural gas, oil, and electricity.   The source of GDP for 2005 was 23% industry, 73% service, and the remaining 4% was from agriculture. The country had some difficulty adjusting after it left the Soviet Union and the situation was turned around by the fiscal discipline the government introduced, where a cap was put to the subsidies enterprises were getting.  Ã‚   The government’s early liberalization effort had enabled the nation to join WTO in 1999.   Overall, the nation had converted itself into a market economy, which enabled it to join the EU in 2004.  Ã‚   Market and price liberalization, privatization, restriction on foreign transaction all are in the right perspective and the result had been positive where privatization is almost complete. Other areas overhauled were the legal system, institutions, and the social safety net.  Ã‚   The GDP growth had made it to 10.2% in 2005 and the unemployment rate was at 8.7% in the same year.   Some of the malice that is affecting the other nations such as low-income level, which was at 47% of the EU average had not spared this nation either.   Because of that labor migration had been escalating after joining the Union which is feared to create a problem in the long run while at the same time the population is aging.   Because of this there is a fear of overheating and the deficit has reached 12.4% while inflation is at 6%, which has contributed to the holding back of the nation from joining the euro and that might be possible in 2010. [6] Cyprus on the other hand has a highly developed infrastructure with a population of 784,000 and with a per capita of $7135.   The macroeconomic policy of the government had focused on meeting the requirement of joining the EU.   There was oil discovery in the sea south of Cyprus and negotiations had gone underway with the neighboring Egypt how to exploit the finding. The overall market structure is based on a free-market basis and is heavily dependant on the service sector, yet there is lack of investment from government and private sector, while at the same time the high cost of freight had been scaring business away, and all this had been worsened by the lack of skilled labor.   In spite of this handicap, the GDP growth rate had made it to 11.4 in 2004 and yet it is lagging behind in attracting FDI.   Even if there is a political problem between the north and south, this particular nation might be among the nations that would join the EU in 2008. [9] Malta is also another island with a population of 404,000, which had transformed itself into a freight transshipment and a financial center as well as a tourist destination.   In addition, it has some limestone and a better productive labor force than Cyprus where the economy is dependent on foreign trade, manufacturing, and tourism.   Its per capita income is much higher than most countries at $20,300 and the unemployment rate for 2006 was at 6.8%.   The island has liberalized its market and privatized some government-controlled firms and the possibility that it might join the euro zone is there. [9] The other nations Czech Republic, Hungary, and Poland, are much bigger nations and there is Slovakia also that are slated to join the euro gradually after meeting the criteria, which might prove to be difficult to them because of their size.   If we take the case of the Czech Republic, it has a population of 10.2 million and a per capita income of $11,110 making it among the highest income earning countries.   After joining the EU in 2004 the process of transforming the economy from centrally planned to a market driven economy is almost complete.   There had been a considerable fiscal consolidation, and the inflation is low at 1.8%, while at the same time it had no problem with its balance of payments. Foreign direct investment is 50% of the GDP making it the only nation that enjoys such inflows of investment, yet, in spite of it, it had a high unemployment rate of more than 8% and is persisting, which might have been because of its high population that is not affected much by the migration of labor. The GDP growth for 2005 was 6%, attained mainly through export created through FDI in the automotive sector.   The fiscal deficit for 2005 was at 3% whereas the current account deficit fell to 2.3% for 2005.   Because of the high unemployment, which is the outcome of sluggish economic performance it might have to stay a bit longer before joining the euro, although the expectation is it will meet the requirement eventually. [10] More or less, the same is applicable to the other three countries Hungary, Poland, Slovakia whose population is 10 million, 38 million, 5.4 million respectively, making Poland the highest populated country among the EU-10 countries.   While Hungry had $10,050 per capita income, Poland had $7,110, and Slovakia had $8,130 in 2005.   Poland had to deal with structural reforms to consolidate public finance, tackle unemployment and poverty, work on making the nation attractive for business by introducing a more efficient government. The fact that up to seven million people live in poverty does not make it look as a good candidate for the euro yet and the unemployment rate is the highest at 16%.   However, the situation is a bit changing after joining the EU in 2004 and there was a growth of 5.3% in GDP in 2004, which created high consumption level, investment opportunity, and a better exporting level, and eventually it will make it a proper candidate to join the euro as it is working to meet that goal.   Its FDI is at 5% of GDP and that is low for such a large country although its inflation rate is low at 2.1% and its current account defect is also under control. [6] On the other hand, Hungary is in a much better position since it was able to attract FDI that is enabling it to build a robust private exporting sector.   If there is a problem, the budget deficit is at 8% due to higher public spending and tax reduction, which could affect the economy in the long run.   Inflation had slowed down to 3.5% for 2005 which was due to regulated prices and a decrease on indirect taxes. The unemployment rate stood at 7.2% in 2006.   Even if the government had introduced a fiscal consolidation program what might be needed to change the situation is a long term structural reform.   Hungary is moving steadily to join the euro gradually, and is better situated than the rest of the countries that are in line to join the euro in the coming years. [6] Slovakia is also in a similar situation with the others where it had a 6% GDP growth in 2005 and had unemployment rate of 16.2%.   In recent years, especially after joining the EU in 2004 it had undertaken major steps to decentralize its economy.   The government had introduced reform in many areas including welfare, pension, health care, labor market, and public finance.   Its GDP for 2005 grew by around 6% and inflation was at 2.7%. The fiscal deficit was at 3.3% while the current account deficit had been 7.8% of GDP for 2005 and it had FDI rate 2.7% of GDP.   Overall, it is working toward meeting the EU’s criteria to join the euro although it is difficult to say when it will meet all the requirements. [6] The conclusion is, there are requirements these nations will have to meet and the major ones are to tackle high level of inflation, a budget deficit below 3% of GDP, the public debt has to be at a manageable level, and maintaining a long term low interest rate in parallel to other central banks. If these are in place side by the side with the Maastricht and the Copenhagen Treaty criteria the time it will take them to join the euro will be shorter. Otherwise, their participation could affect the smooth operation of the whole Union, as well as it will put them at a disadvantage offsetting their whole fiscal and monetary policy. [11] REFERENCE The Union Welcomes Ten New Countries [Online]. Available:   Ã‚  Ã‚  Ã‚   http://www.delnam.cec.eu.int/OurNewsletter/2004/ECNewsMay04.pdf.   March 14, 2007. European Parliament Fact Sheet. [Online]. Available:   Ã‚  Ã‚   www.europal.europa.eu/facts/2_3_0_en.htm.   March 14, 2007. The Challenge of European Economy in 2004. [Online]. 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